Friday, 28 November 2014

Commodity Prices – Swings and Roundabouts

Commodity markets had
gone off in their own direction but are now back on track to help out with the
global economy

The global economy has suffered more downs than ups over the
past few years but lower commodity prices will provide some long needed cheer. Long after the onset of the global financial
crisis, prices for everything from copper to vegetable oil continued to rise stoked
by demand from places such as China.
Weaken global demand has finally taken affect and relief in on the way
for consumers everywhere. It is likely
to provide a bigger boost than just a bit of extra cash.

A guide to the road
ahead

Commodity markets often follow their own roadmap. Demand for different materials can rise and
fall depending on changes in technology or consumption patterns. The rising wealth of China and India has
pushed up prices for everything from gold to milk powder. New fracking technology has lowered the price
of oil while corn became more expensive due to its use in producing ethanol in
the United States.

Supply further complicates matters as rising demand for any commodity
will prompt companies to increase output but this often takes time. There is a lag of a year or so for farmers to
shift from growing one crop to another and even longer for a new mine or source
of oil to be developed. The changing
demand and the delayed response on the supply side means that twists and turns
in the commodity markets are often accentuated.

Back on the map

Prices in the commodity markets had long been out of kilter
with the slump in global demand but this seems to be over. The price of oil, which has been making news
recently, is indicative of this new trend.
Increased output in the US coupled with a tailing off of demand from
energy-hungry China has resulted in a sharp turnaround in prices. High prices for commodities such as oil often
do not last as more money gets spend on both finding more oil as well as on increasing
energy efficiency to lower money spent on oil.
Both of these factors act to stop the price of oil getting out of
hand.

Market correcting forces move in both directions and also
work to prevent excessive falls in prices.
Investments in producing commodities are put on hold if prices drop back
and low supply tempers a decline in prices.
Lower prices also mean that interest in using resource more efficiently
tends to fade. This is why commodity
prices tend to fluctuate in big swings of boom and bust. With the world economy have just endured a
period of high prices, the commodity market seems to be swinging in the
opposite direction. Considering the big
swings in commodity prices, this trend is not likely to be reversed any time
soon.

Heading in the right
direction

The benefits of lower commodity prices extend beyond the
obvious effects of cheaper prices at the petrol pump, on our gas and power
bills, and when stocking up at the supermarket.
Less money will go to places such as Saudi Arabia and Russia, where high
oil prices only add to the riches of already wealthy individuals, and consumers
across the globe will instead have more money in their pockets. As such, the global economy will benefit as
this extra cash will likely to spent rather than piling up in the bank accounts
of rich Saudis or Russians.